Yellen says not all deposits are secure in future financial institution failures

WASHINGTON – Treasury Secretary Janet Yellen on Thursday tried to reassure markets and lawmakers that the federal government is committed to protecting U.S. bank deposits after the collapse of Silicon Valley Bank and Signature Bank over the weekend.

“Our banking system remains sound and Americans can be confident that their deposits will be there when they need them,” Yellen said in testimony before the Senate Treasury Committee.

However, when asked, Yellen admitted that not all depositors are protected beyond the FDIC insurance limits of $250,000 per account, as was the case for customers of the two failed banks.

A Silicon Valley Bank office is seen March 14, 2023 in Tempe, Arizona.

Rebecca Edel | AFP | Getty Images

Yellen has been at the center of federal emergency efforts over the past week to recover deposits from account holders at two failing banks, California-based SVB and crypto-heavy New York-based Signature Bank.

A majority of SVB’s clients were small technology companies, venture capital firms and entrepreneurs who used the bank for day-to-day cash management to run their businesses. These customers had $175 billion in deposits with tens of millions in individual accounts. This left the SVB with one of the highest proportions of uninsured deposits in the country after the collapse, with 94% of its deposits ending up above the FDIC’s $250,000 insurance limit, according to 2022 S&P Global Market Intelligence data.

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US banking regulators announced Sunday a plan to fully insure all deposits at the two failed banks, including those over the $250,000 limit covered by traditional FDIC insurance. The additional protection is paid for out of a special fund made up of fees charged by all FDIC-insured institutions.

In addition, the Federal Reserve eased its borrowing standards for banks seeking short-term funding through their so-called discount window. A separate unlimited facility was also set up to offer one-year loans on looser terms than usual to protect troubled banks from a surge in cash withdrawals. Both programs will be paid for by industry fees and not by taxpayers, the Biden administration stressed.

“This will help financial institutions meet the needs of all their depositors,” Yellen said. “This week’s actions demonstrate our determination to ensure depositors’ savings remain safe.”

Democrats and Republicans in Congress have broadly backed the emergency measures taken over the past week. However, as markets recovered somewhat, lawmakers questioned Yellen on Thursday about whether backstops for big banks will become a new norm and what that could mean for community lenders.

“I am concerned about the precedent of guaranteeing all deposits and the market expectations that are evolving,” said Sen. Mike Crapo, R-Idaho, the committee’s senior member, in his opening remarks.

People queue outside a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Republican Senator James Lankford of Oklahoma pressed Yellen on how far backstops on uninsured deposits will apply across the banking sector.

“Will the deposits in every community bank in Oklahoma, regardless of size, now be fully insured?” Lankford asked. “Will they get the same treatment as SVB or Signature Bank?”

Yellen acknowledged that they would not.

Uninsured deposits, she said, would only be covered in the event that “a failure to protect uninsured depositors would result in systemic risk and significant economic and financial consequences.”

Lankford said the impact of this standard would be that small banks would be less attractive to depositors above $250,000, the current FDIC insurance threshold.

US Treasury Secretary Janet Yellen takes questions about the Biden administration’s plans after the collapse of three US lenders, including Silicon Valley Bank and Signature Bank, as she addresses a Senate Finance Committee hearing on US President Joe’s proposed budget proposal Biden testifying for fiscal year 2024, on Capitol Hill in Washington, March 16, 2023.

Mary F Calvert | Reuters

“I’m concerned that you’re … encouraging anyone who has a large deposit at a community bank to say, ‘We’re not going to make you whole, but if you go to one of our favorite banks, we’ll make you whole.'”

“It’s certainly not something we encourage,” Yellen replied.

Congressmen are currently considering a series of legislative proposals that should prevent the next failure of the Silicon Valley bank.

One is an increase in the FDIC’s $250,000 insurance limit, which several top Democratic lawmakers have been calling for following the collapse of the SVB.

After the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000 and approved a plan under which large banks would contribute more to the insurance fund than smaller lenders.

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